Bank of England: Brussels is an obstacle to reducing risk

One of the biggest threats to financial stability in the UK is potential
interference by the European Union (EU) that would create a "race to
the bottom" between regulators, the Bank of England has warned.

A pedestrian walks past European Union (EU) flags outside the the European Commission headquarters, in Brussels on Monday. The Bank of England warned that Brussels was proving an obstacle to reducing systemic risk.Photo: Bloomberg

Brussels has demanded that key banking regulations are set centrally, making national supervisors little more than arms-length officials policing the EU code. However, in a discussion paper on the new "toolkit" of powers the Bank is requesting to prevent a rerun of the financial crisis, it warned that Brussels was proving an obstacle to reducing systemic risk.

The Bank also appeared to endorse David Cameron's decision to veto the revised EU treaty after failing to secure additional safeguards for independent UK financial regulation.

The broadside against Brussels came in a consultation document from the Bank's Financial Policy Committee (FPC), which will have the power to instruct lenders to increase capital buffers or demand larger deposits from homebuyers to prevent dangerous bubbles forming in the financial system.

The document proposed 15 "tools" and cited examples of where the powers have been used and with what success to open a broad consultation with banks and users of finance. Responses are due by March next year, when the Bank will decide which "tools" to recommend to the Treasury.

"The key hurdle arising with the national discretion criterion is that the powers may be constrained by EU law," the Bank said. "In particular, the draft Capital Requirements Regulation is a so-called 'maximum harmonising' regulation.

"Maximum harmonisation of regulatory standards restricts the discretion for national authorities to tighten regulatory levers to guard against systemic risk. The main rationale for establishing common minimum standards is to avoid a 'race to the bottom' in international regulatory rules. The rationale for maximum standards is not clear."

The Bank added: "At its September meeting, the [FPC] judged that the maximum harmonisation approach risked fundamentally impeding its ability to meet its proposed statutory objective. For this reason, it urged HM Treasury to continue its efforts to alter the course of European legislation in this area."

Under the planned Financial Services Bill, the FPC will have the power to instruct specific banking supervisors to enforce any "tool" it deems necessary. Among the 15 currently proposed, banks could be made to increase capital against risky assets, build extra capital or liquidity buffers, or tighten loan-to-value requirements. Not all 15 are expected to be adopted.